HONG KONG - China's leaders at the end of last month used a series of meetings
to set the tone for macroeconomic policy for the second half of the year, with
priority to be given to curbing inflation while maintaining stable and
relatively fast economic growth, rather than preventing overheating.
The new economic policy direction came in response to the country's economic
and foreign trade position after the US subprime mortgage collapse and record
high international oil prices.
The People's Bank of China (PBoC), the central bank, said in a
statement on its website at the start of last week after its monetary policy
committee's second-quarter meeting that steady growth and the prevention of
rapid price increases will be the main goals of economic policies.
The central bank omitted the mention of "tight" monetary policy, which had
featured in its previous statements. This was widely seen as a sign that the
government is preparing for a slide in the Chinese economy and echoed a
statement from the Political Bureau of the Central Committee of the Communist
Party of China (politburo) after they met on July 25 to set the tone for
macroeconomic policy for the second half.
China's highest decision-making body said curbing price increases and
maintaining steady and relatively fast economic growth were both priorities,
state-run China Central Television (CCTV) reported.
Quoting the politburo, CCTV said the goal of achieving stable growth has been
made more difficult by uncertainties and instabilities in the global economy.
The meeting came days after Premier Wen Jiabao visited leading cities and
export bases Zhejiang, Shanghai and Guangdong and President Hu Jintao made a
trip to Shandong, a province south of Beijing that is an important center for
grain and oil production.
During his two-day trip to Guangdong, which has been at the forefront of the
country's economic development over the past 30 years, Wen called for efforts
to promote steady and relatively fast economic growth, according to Xinhua News
Agency, fueling speculation that Beijing may take measures to help exporters.
Mainland export growth slowed to 17.6% year-on-year in June, compared with
28.1% growth in May, according to official statistics.
In the first six months of the year, export growth slowed to 21.9%
year-on-year, compared with 27.6% a year earlier. The trade surplus for the
first half amounted to US$99.04 billion, down by 11.8% from the $112.3 billion
a year earlier.
Meanwhile, gross domestic product (GDP) growth eased to 10.1% in the second
quarter from 10.6% in the first three months this year, amid expectations of
the slowdown worsening.
Inflation is also easing, with the consumer price index (CPI) falling to 7.1%
in June, compared with May's 7.7%. Even so, it is under pressure in the face of
a possible resurgence in food prices and the strengthening producer price
index, which rose 8.8% in June from a year earlier, the fastest rise since
1999. Analysts expect it will take three to six months for manufacturers to
pass on their cost pressures to consumers.
Wang Tao, head of the China economic research unit of UBS, said the Chinese
economy is set to slide further due to a weaker global outlook and slower
export-related investment. UBS has reaffirmed its forecast of 10% GDP growth
this year, and lowered the forecast for 2009 to 8.8% from 9.5%.
Wang said that the authorities are looking to give stable economic growth more
weight.
Frank Gong and Qian Wang, economists at JP Morgan Chase & Co, wrote in a
research note on July 27 that the policy goals have shifted for the second half
of the year.
"The authorities are increasingly concerned about the potential slowdown of the
Chinese economy given the further downshift in global demand and financial
market turmoil, the increasing challenges faced by small and medium-sized
enterprises and the rising living costs for the low-income group," it wrote.
Jia Kang, director of the research institute for fiscal science under the
Ministry of Finance, said the challenge facing Beijing now is that they have to
strike a balance between controlling inflation and maintaining decent growth.
To achieve the new policy direction, Beijing could reasonably reduce government
expenditures on general operations, an unnamed official of the Ministry of
Finance was quoted as saying by the 21st Century Business Herald.
After extensive damage was caused by the Sichuan earthquake in May, adding
uncertainties to the economic outlook, Premier Wen announced central government
spending will be slashed by 5% this year as funding is focused on quake-relief
efforts.
He ordered all government organizations and public institutions to cut their
general budget, slash all unnecessary activities and halt construction of any
new office buildings for government bodies.
The unnamed official also said that with the increasing concerns over export
slowdown and the shrinking profit margins for exporters, the authorities will
adjust tax rebates.
The Ministry of Finance on August 1 said on its website that the tax rebate on
a range of textiles and garments will be raised to 13% from 11% with immediate
effect. Tax rebates on a slew of energy-intensive and resource products such as
zinc, batteries and silver were scrapped.
Last year, the government reduced the rebate rates of the value-added tax for
more than 2,800 items of products, including hundreds of textiles and garments,
to help slow the country's surging export growth.
Exports in the textile and garment sectors, which create job opportunities for
more than 15 million people, in June declined by 4.2% year-on-year to $15.5
billion, the slowest increase in five years.
Yi Xianrong, a researcher with the institute of finance and banking under the
Chinese Academy of Social Sciences, believes Beijing is relaxing its policy in
regard to several sectors and local government will be more flexible to boost
the economy.
"Policymakers will shift direction to 'structural adjustment' from its blanket
tightening policy," he said. "Several sectors including exports and small and
medium-sized enterprises might benefit from the policy shift."
Even so, loosening of monetary policy will not take place in view of high
inflation. he said.
Fan Gang, a member of the central bank's monetary policy committee, said it's
unlikely Beijing will loosen its monetary policy when the CPI is rising at a
rate as fast as 7% or 8%. "This is not just an economic issue, this is also a
social issue," he said on July 30.
Olivia Chung is a senior Asia Times Online reporter.
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